A spate of air crashes throughout the world has made the firstseven months of this year “the worst period” for the aviationinsurance industry since 2001, an international insurance brokerageindustry official acknowledges.

But as noted by officials at Marsh, one of three U.S. brokersactive in the airline insurance space, this category “has been veryprofitable over the last four years,” and is well capitalized.

At the same time, industry officials see little impact onairline passengers because insurance constitutes only a traceexpense for airline carriers.

However, contrary to recent reports, says Jonathan Palmer Brown,chairman, JLT International Specialty in London “there have not yetbeen renewals in the market for major carriers” in the war-riskmarket since the MK 17 loss in the Ukraine.

“Therefore it is premature and speculative to talk about thelevel of price rises” for war-risk insurance, the mostprice-sensitive component in this market, Brown says. He is alsochairman of the Aviation Committee of the London InternationalInsurance Brokers' Association (LIIBA).

Flight plans and coverage limitations

At the same time, Brown did say it is true some insurers areasking for precise details of flight plans and are considering nolonger providing certain types of coverage for flights over areasof armed conflict in the Middle East and parts of Africa.

“Limitations are being applied,” Brown says. Specifically, henotes, there are certain geographical limitations surroundingflights to the Eastern Ukraine and Libya.

(The latest example was Friday, when the U.S. Federal AviationAdministration issued guidance telling airlines flying over Iraq tocontinue flying at over attitudes over 30,000 feet. The guidance ismandatory only for U.S. carriers.)

Brown said that it is “too early to comment” as to whether therewill be substantive price hikes because “there have been no majorrenewals since” the Malaysia Airlines plane was shot down in theEastern Ukraine.

“We would hope that insurers will leave any price amendments, ifthere are to be any, until the next renewal, although on the hullwar section they do have the opportunity to give notice tore-price,” Brown says. “Certainly there could be someanticipation of price rises on the war-risk policies.”

State of the market

Neil Smith, head of underwriting, adds that “there is capacityaround the world” for war-risk airline insurance, and that Lloyd'smanaging agents generate most of the capacity for war-riskinsurance. “But the market for all-risk insurance is much broader,”Smith says.

Hayes says he expects aviation insurance in general will rise,but that he doesn't see much of an impact on consumers. “The costof insurance is minimal; it comes out to 40 to 50 cents perpassenger per flight,” Hayes said. “If rates increase 20%, thatwill translate into pennies per passenger.”

Hayes estimates hull-risk insurance will go up “considerably tocover the cost of these planes, but then they will go down again”as the losses recede.

For all-risk policies, there is a different story, Hayes said.“You would expect rates to increase, but there is so muchover-capacity in the market at the moment, some underwriters willsay that the Malaysian losses are so unusual, they will not happenagain, and therefore we should not increase rates.

“We will have to wait and see,” Hayes says.

Garrett Hanrahan, Marsh U.S. aviation practice leader, adds,“Underwriters are reacting in a rational manner and are looking atthe individual risk profiles of airlines, based on geographies andclaims histories.”

The 2013 gross premium estimates for all-risk insurance is$1.671 billion, according to David Gasson, secretary general of theInternational Union of Aerospace Insurance (IUAI), theinternational association which represents insurers in theaviation/space sector.

War-risk insurance, which airlines pay for separately, had 2013written premiums of $87 million, a relatively low figure. Anothersector, liability insurance for airlines, had written premiums of$132 million, Gasson projects.

Hayes projects that so-called “hull war” premiums will rise by“hundreds of percent.” He projects losses in this category, fromdamages to planes parked in an airport in Libya as well as theMalaysian Airlines losses, the plane that disappeared earlier thisyear and the Ukrainian disaster, will total $600 million or more,and premiums for this year are around 12% of that.

“This year, the war market is paying for half of the firstMalaysia hull,” Hayes says, “It is paying 100% of the secondMalaysian loss.”

He adds that losses from aircraft damaged and destroyed atKarachi, then the war loss due to fighting in Tripoli, Libya, plusother losses, will bring the total to $600 million or more.

Hayes notes that, in Tripoli, inspectors cannot even get to thescene. “It is not safe, and the policies have been cancelled. Theeairlines involved are Libya Airlines, Afriqiyah Airlines andanother airline company,” Hayes says. “The airlines are responsiblefor this,” he adds, saying that the rough estimate from losses onthis terrorist act alone is around $400 million.